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Should Courts Always Enforce What Contracting Parties Write?

  • Anderlini, Luca
  • Felli, Leonardo
  • Postlewaite, Andrew

We find an economic rationale for the common sense answer to the question in our title - courts should not always enforce what the contracting parties write. We describe and analyse a contractual environment that allows a role for an active court. An active court can improve on the outcome that the parties would achieve without it. The institutional role of the court is to maximize the parties’ welfare under a veil of ignorance. We study a buyer-seller model with asymmetric information and ex-ante investments, in which some contingencies cannot be contracted on. The court must decide when to uphold a contract and when to void it. The parties know their private information at the time of contracting, and this drives a wedge between ex-ante and interim-efficient contracts. In particular, some types pool in equilibrium. By voiding some contracts that the pooling types would like the court to enforce, the court is able to induce them to separate, and hence to improve ex-ante welfare.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4197.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4197
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  1. Leonardo Felli & Alessandro Riboni & Luca Anderlini, 2007. "Statute Law or Case Law?," 2007 Meeting Papers 952, Society for Economic Dynamics.
  2. Luca Anderlini & Leonardo Felli & Andrew Postlewaite, 2006. "Active Courts and Menu Contracts," STICERD - Theoretical Economics Paper Series /2006/511, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
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  4. Anderlini Luca & Felli Leonardo & Postlewaite Andrew, 2011. "Should Courts Always Enforce What Contracting Parties Write?," Review of Law & Economics, De Gruyter, vol. 7(1), pages 14-28, February.
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